Edited version of private advice

Authorisation Number: 1051631078579

Date of advice: 14 February 2020

Ruling

Subject: Lump sum compensation payments paid pursuant to the Return to Work Act 2014 (South Australia) (RWA)

Question 1

Is the amount or any portion of paid pursuant to section 33 and paragraph 54(1)(a) of the RWA, be included in your assessable income?

Answer

No.

Question 2

Is the amount of or any portion of paid pursuant to section 58 of the RWA, be included in your assessable income?

Answer

No.

Question 3

Is the amount of or any portion of paid to enter into a Deed of Settlement and Release, be included in your assessable income?

Answer

Yes.

This ruling applies for the following period:

1 July 20xx

The scheme commences on:

Year ending 30 June 20xx

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

·        You were employed.

·        You sustained an injury in the workplace.

·        You submitted a claim to your employer for compensation, seeking weekly payments of income maintenance and medical expenses from your employer.

·        Your employer rejected your claim for compensation.

·        You lodged Case x with the South Australia Employment Tribunal (SAET) to have your employer's decision reviewed.

·        The SAET issued the following orders:

-        The SAET confirmed your employer's decision, rejecting your compensation claim.

-        The SAET included additional orders to compensate you for the same injury, sustained on DD MM YYYY.

·        In accordance with Part 2 Division 5 of the RWA you have been assessed as having a whole person impairment (WPI) of x%.

·        As the injury resulted in you having a degree of permanent physical impairment, you were entitled to two lump sum payments pursuant to 58 of the RWA.

·        Section 58 of the RWA provides an entitlement to a lump sum payment for non-economic loss for a worker who has been assessed as suffering 5% or more WPI as a result of their work injury, subject to certain exceptions.

·        Subsection 58(4) of the RWA states that the lump sum will be an amount that represents a portion of the prescribed sum calculated in accordance with the regulations.

·        Non-economic loss is defined in the RWA as:

-        pain and suffering

-        loss of amenities of life

-        loss of expectation of life

-        disfigurement

-        any other loss or detriment of non-economic nature.

·        You were offered a dissected lump sum in settlement of your entitlement pursuant to sections 33 and paragraph 54(1)(a) of the RWA.

·        You were offered a dissected lump sum in settlement of your entitlement pursuant to sections 58 of the RWA.

·        You were offered a dissected lump sum to enter a Deed of Settlement and Release.

·        As part of the agreement you had to resign.

·        The employer is a self-insured employer within the meaning of the RWA and you have provided a copy of a letter from their insurer detailing the claim, permanent impairment assessment offer and decision.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 Section 15-30

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 Section 118-37

Reasons for decision

Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary and statutory income (for example, capital gains) derived directly and indirectly from all sources, whether in or out of Australia during the income year.

The ITAA 1997 does not provide specific guidance on the meaning of ordinary income. However, a substantial body of case law exists which identifies its likely characteristics. Amounts that are periodic, regular or recurrent and relied upon by the recipient for their regular expenditure are likely to be ordinary income, as are amounts that are the product of any employment of, or services rendered by, the recipient. Further, amounts which compensate for lost income or serve as a substitute for other income are themselves income according to ordinary concepts.

Section 58 of the RWA entitles a worker to compensation for non-economic loss by way of a lump sum. The amount received is calculated as a proportion of the prescribed sum for the degree of WPI caused by the work injury. It is a one-off lump sum payment baring none of the characteristics of ordinary income as it lacks any element of periodicity, recurrence or regularity, and nor is it paid to compensate for loss of income.

Therefore, the amounts paid pursuant to section 33 and 58 of the RWA are capital in nature and will not be assessable as ordinary income.

The receipt of a lump sum compensation amount may give rise to a capital gain (statutory income) under CGT event C2 (section 104-25 of the ITAA 1997) which relates to cancellation, surrender or similar endings. However, a capital gain or loss made upon the ending of a CGT asset acquired on or after 20 September 1985 is disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong or injury you suffer in your occupation.

In your case, the amounts paid pursuant to section 33 and 58 of the RWA is compensation for a 'wrong or injury you have suffered in your occupation', being the loss of body functionality in respect of your workplace injury.

Therefore, any capital gain or capital loss arising from the CGT event will be disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997 and the payments will not be assessable as statutory income.

The amounts paid pursuant to section 33 and 58 of the RWA are not assessable as either ordinary or statutory income and you are not required to include the amounts in your assessable income.

Employment Termination Payment (ETP)

Taxation Ruling (TR) 2003/13 discusses the meaning of the phrase 'in consequence of' in the context of the expression 'in consequence of the termination of any employment' as used in Subdivision 82-C of the Income Tax Assessment Act 1997 ('ITAA 1997'). Paragraphs 31 to 32 of these ruling states:

'Settlement of litigation proceedings:

31. It is clear from the decision in Le Grand, that when a payment is made to settle a claim brought by a taxpayer for wrongful dismissal or claims of a similar nature that arise as a result of an employer terminating the employment of the taxpayer, the payment will have a sufficient causal connection with the termination of the taxpayer's employment. The payment will be taken to have been made in consequence of the termination of employment because it would not have been made but for the termination.

32. The Federal Court in Dibb v. FC of T 5 adopted the approach of Goldberg J in Le Grand. At issue was whether a payment received by the taxpayer under a deed of release, following the settlement of Federal Court proceedings against his former employer, was an ETP. In deciding the payment was an ETP, Heery J held that the length of time between the termination of employment, the commencement of court proceedings and payment following settlement did not sever the causal connection between the termination and the payment. It was sufficient that the subject matter of the litigation was the termination. Heery J found at 296 that:

'The various causes of action whether breach of contract, conspiracy, breach of fiduciary duty or contravention of the Trade Practices Act were, as Goldberg J would say (Le Grand at [36]), 'interwoven and intertwined' with the termination. The payment was a consequence of the settlement, which was a consequence of the Federal Court proceeding, which in turn was a consequence of the termination.'

As there is sufficient causal connection between the taxpayer's termination of employment and the payment, and the payment is sufficiently identified in the deed that it does not fall under the ETP exemption categories under section 82-135 of the ITAA 1997, the payment is an ETP and should therefore be declared in your assessable income.